DATA centre landlord Digital Core Reit on Thursday (Feb 1) announced a 7.3 per cent fall in distribution per unit (DPU) to US$0.0178 for the six months ended Dec 31, 2023.

Its H2 gross revenue fell 10.4 per cent to US$49.2 million, while net property income (NPI) was down 17.9 per cent to US$27.9 million.

The Reit was partly hit by the bankruptcy of its second-largest customer, which had accounted for around US$16 million or 22 per cent of its annualised revenue. As a result of the bankruptcy, Digital Core Reit recorded a US$3.4 million write-off of straight-line rent in H2.

The half-year’s bottom line was also hit by higher property expenses, which rose 1.9 per cent to US$21.3 million, amid higher taxes.

Overall, for FY2023, Digital Core Reit posted a 7 per cent fall in DPU to US$0.037. The full-year gross revenue fell 4.8 per cent to US$102.6 million, while NPI was down 9.1 per cent to US$63.1 million.

Digital Core Reit owns 12 facilities in the US, Canada, Germany and Japan. As at Dec 31, the portfolio was 97 per cent leased, with a weighted average lease expiration of 2.8 years.

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The business “turned a pivotal corner” in late 2023, when it reached agreements to resolve the large customer bankruptcy, said the Reit manager’s chief executive, John Stewart, who is optimistic about the outlook ahead despite observing some “modest” cap rate expansion.

In an earnings call, he said the Reit continues to see a “very healthy” bid for data centres in the private market, as data centre fundamentals have continued to tighten, given the rapidly strengthening tailwinds for artificial intelligence workloads.

“The acceleration in demand, coupled with the limited supply, is driving greater and better rent growth, and serving to partially offset the impact of cap rate expansion on data centre valuations,” he said.

He also believes that cap rate expansion comes with a silver lining. 

Elaborating, he said a perceived peak in the US interest rate tightening cycle has spurred a recovery in the prices of Reit units. 

Alongside that, data centre cap rates have begun to edge up, significantly narrowing the gap between valuations in the public market and those in the private transaction market.

“This convergence puts us in an excellent position to capitalise on favourable fundamentals in our industry-leading acquisition pipeline and create durable value for unitholders,” he concluded.

Digital Core Reit’s aggregate leverage was 40.5 per cent as at Dec 31, 2023. Its weighted average cost of debt for FY2023 was 4.5 per cent, while the weighted average debt maturity was 2.8 years.

The Reit ended Thursday at US$0.64, down US$0.005 or 0.8 per cent.